Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put The Cheesecake Factory Incorporated CAKE stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Cheesecake Factory has a trailing twelve months PE ratio of 17.26, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 18.63. If we focus on the stock’s long-term PE trend, the current level puts Cheesecake Factory’ current PE ratio slightly below its midpoint (which is 20.83) over the past five years.
Further, the stock’s PE compares favorably with the Zacks Retail-Wholesale sector’s trailing twelve months PE ratio, which stands at 28.21. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Cheesecake Factory has a forward PE ratio (price relative to this year’s earnings) of just 16.19, so it is fair to say that a slightly more value-oriented path may be ahead for Cheesecake Factory’ stock in the near term too.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Cheesecake Factory has a P/S ratio of about 0.82. This is significantly lower than the S&P 500 average, which comes in at 3.36 right now. Also, as we can see in the chart below, this is somewhat below the highs for this stock in particular over the past few years.
If anything, this suggests some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Cheesecake Factory currently has a Value Style Score of B, putting it into the top 40% of all stocks we cover from this look. This makes CAKE a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for Cheesecake Factory is just 1.25, a level that is slightly lower than the industry average of 2.13. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Additionally, its P/CF ratio (another great indicator of value) comes in at 9.36, which is somewhat better than the industry average of 12.16. Clearly, CAKE is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Cheesecake Factory might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of B and a Momentum score of C. This gives CAKE a VGM score—or its overarching fundamental grade—of B. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been disappointing. The current quarter consensus estimate has fallen 1.2% in the past two months, while the full year estimate has dipped 0.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
The Cheesecake Factory Incorporated Price and Consensus
The Cheesecake Factory Incorporated price-consensus-chart | The Cheesecake Factory Incorporated Quote
Despite this somewhat bearish trend, the stock has a Zacks Rank #2 (Buy) on the back of its strong value metrics and this is why we are expecting above-average performance from the company in the near-term.
Cheesecake Factory is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Boasting a good industry rank (top 38% out of more than 250 industries) and a strong Zacks Rank, the company deserves attention right now. However, over the past one year, the sector has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates, analyst sentiment and industry trend to turn favorable in this name first, but once that happens, this stock could be a compelling pick.
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